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S&P: State and Local Governments Should Be Able to Avoid Bankruptcy, Defaults

WASHINGTON — State and local governments generally will be able to take steps to address the economic turbulence they face without filing for bankruptcy or defaulting on their debt, Standard & Poor's said in a pair of reports released Monday.

The question is whether governments choose to take such actions as halting funding of pension and other post-employment benefit systems that could compromise their credit pictures in the future, the rating agency said in one of the reports.

"We believe the crises that many state and local administrators find themselves in are policy crises, rather than questions of governments' continued ability to exist and function," Standard & Poor's said in the report, called U.S. States and Municipalities Face Crises More of Policy Than Debt. The crises "are more about tough decisions than potential defaults."

The rating agency said that for significant defaults to occur, state and local governments would have to face revenue declines roughly double to what they were during the Great Depression and that this is not likely to occur.

Ongoing fiscal pressures will force states and localities to continue to cut or eliminate certain services, the report said.

Governments "may also have to raise taxes or fees, which we think could motivate businesses to relocate or perhaps cut back employment," it said.

But S&P added, "We believe worst-case scenario discussions are relevant only to the extent that governments are unable or unwilling to use their powers of adjustment, and history strongly suggests that the majority of governments can and will make the needed adjustments."

Some governmental actions are better than others, the report suggests. Fiscal pressures make it tempting for some governments to stop funding their pension and other post-employment benefit systems.

"Governments that aren't funding their annual required contributions risk even starker future changes in budget capacity," analysts warned. However, pension reform movements are underway in many states, they noted.

Overall, "while there are vulnerabilities in the municipal sector, we believe the evidence indicates that the threat of default isn't severe," the rating agency said. Moreover, whatever political crises the recession has caused, and whatever the doubts that may be held about the wisdom of public policy directions or the priorities of the public sector, in our opinion the majority of U.S. state and municipal governments will likely survive the recession without defaulting."

The rating agency pointed out that even stressed governments like California and Detroit "have enjoyed market access at what we view as favorable rates."

The second report — U.S. States' Financial Health and Debt Compare Favorably with Other Regions — shows that states in the U.S. are much more well-positioned to deal with the aftermath of the global recession than some non-U.S. governments such as Ontario, Canada, Bavaria in Germany, and Basel City, Switzerland.


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